SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
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Commission file number 000-27205
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NORTH CAROLINA 56-2132396
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658
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(Address of Principal Executive Offices) (Zip Code)
(828) 464-5620
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(Registrant's Telephone Number, Including Area Code)
Securities to be Registered Pursuant to Section 12(b) of the Act: NONE
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Securities to be Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. $37,396,118.80 based on the closing price of such common stock on
March 14, 2003, which was $14.60 per share.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,133,547 SHARES OF COMMON STOCK, OUTSTANDING AT MARCH 14, 2003.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the
year ended December 31, 2002 (the "Annual Report"), which is included as
Appendix A to the Proxy Statement for the 2003 Annual Meeting of Shareholders,
are incorporated by reference into Part I and Part II.
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders of
Peoples Bancorp of North Carolina, Inc. to be held on May 1, 2003 (the "Proxy
Statement"), are incorporated by reference into Part III.
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF PEOPLES BANCORP OF
NORTH CAROLINA, INC. (THE "COMPANY"). THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES AND ARE BASED ON THE BELIEFS AND ASSUMPTIONS OF
MANAGEMENT OF THE COMPANY AND ON THE INFORMATION AVAILABLE TO MANAGEMENT AT THE
TIME THAT THESE DISCLOSURES WERE PREPARED. THESE STATEMENTS CAN BE IDENTIFIED BY
THE USE OF WORDS LIKE "EXPECT," "ANTICIPATE," "ESTIMATE" AND "BELIEVE,"
VARIATIONS OF THESE WORDS AND OTHER SIMILAR EXPRESSIONS. READERS SHOULD NOT
PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS AS A NUMBER OF IMPORTANT
FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, (1) COMPETITION IN THE MARKETS
SERVED BY PEOPLES BANK (THE "BANK"), (2) CHANGES IN THE INTEREST RATE
ENVIRONMENT, (3) GENERAL NATIONAL, REGIONAL OR LOCAL ECONOMIC CONDITIONS MAY BE
LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION
IN CREDIT QUALITY AND THE POSSIBLE IMPAIRMENT OF COLLECTIBILITY OF LOANS, (4)
LEGISLATIVE OR REGULATORY CHANGES, INCLUDING CHANGES IN ACCOUNTING STANDARDS,
(5) SIGNIFICANT CHANGES IN THE FEDERAL AND STATE LEGAL AND REGULATORY
ENVIRONMENT AND TAX LAWS, (6) THE IMPACT OF CHANGES IN MONETARY AND FISCAL
POLICIES, LAWS, RULES AND REGULATIONS AND (7) OTHER RISKS AND FACTORS IDENTIFIED
IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
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PART I
ITEM 1. BUSINESS
GENERAL
Peoples Bancorp of North Carolina, Inc. (the "Company"), was formed in 1999
to serve as the holding company for Peoples Bank (the "Bank"). The Company is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Company's sole activity consists of owning
the Bank. The Company's principal source of income is any dividends which are
declared and paid by the Bank on its capital stock. The Company has no
operations and conducts no business of its own other than owning the Bank.
Accordingly, the discussion of the business which follows concerns the business
conducted by the Bank, unless otherwise indicated.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities through 15 offices located in Lincolnton, Newton, Denver, Catawba,
Conover, Maiden, Claremont, Hiddenite, and Hickory, North Carolina. At December
31, 2002, the Company had total assets of $644.7 million, net loans of $519.1
million, deposits of $515.7 million, investment securities of $71.7 million, and
shareholders' equity of $48.6 million.
The Bank has a diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable rate
commercial property loans. Commercial loans are spread throughout a variety of
industries with no one particular industry or group of related industries
accounting for a significant portion of the commercial loan portfolio. The
majority of the Bank's deposit and loan customers are individuals and small to
medium-sized businesses located in the Bank's market area.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Commissioner of Banks (the "Commissioner").
At December 31, 2002, the Bank employed 201 full-time equivalent employees.
SUBSIDIARIES
The Bank is a subsidiary of the Company. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Real Estate Advisory Services, Inc.
Through a relationship with Raymond James Financial Services, Inc., Peoples
Investment Services, Inc. provides the Bank's customers access to investment
counseling and non-deposit investment products such as stocks, bonds, mutual
funds, tax deferred annuities, and related brokerage services. Real Estate
Advisory Services, Inc., provides real estate appraisal and real estate
brokerage services.
In December 2001, the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust I ("PEBK Trust"), which issued $14 million of
guaranteed preferred beneficial interests in the Company's junior subordinated
deferrable interest debentures that qualify as Tier I capital under Federal
Reserve Board guidelines. All of the common securities of PEBK Trust are owned
by the Company.
MARKET AREA
The Bank's primary market consists of the communities in an approximately
25-mile radius around its headquarters office in Newton, North Carolina. This
area includes Catawba County, Alexander County, Lincoln County, the western
portion of Iredell County and portions of northeast Gaston County. The Bank is
located only 40 miles north of Charlotte, North Carolina and the Bank's primary
market area is and will continue to be significantly affected by its close
proximity to this major metropolitan area.
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Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, technology, services
and utilities. Catawba County's largest employers include CommScope, Inc.
(manufacturer of fiber optic cable and accessories), Corning Cable Systems, LLC
(manufacturer of fiber optic cable and accessories) and Frye Regional Medical
Center. Other significant area employers include several furniture
manufacturing companies (Thomasville Furniture Industries, Inc., Century
Furniture Company, Inc. and Hickory Springs Manufacturing Co.) as well as
Catawba County Schools.
COMPETITION
The Bank has operated in the Catawba Valley region for more than 90 years
and is the only financial institution headquartered in Newton. However, the
Bank faces strong competition both in attracting deposits and making loans. Its
most direct competition for deposits has historically come from other commercial
banks, credit unions and brokerage firms located in its primary market area,
including large financial institutions. Two national money center commercial
banks are headquartered in Charlotte, North Carolina, only 40 miles from the
Bank's primary market area. Based upon June 30, 2002 comparative data, the Bank
had 20.09 % of the deposits in Catawba County, placing it third in deposit size
among a total of 11 banks with branch offices in Catawba County.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The Bank's deposit base has grown principally due to economic
growth in the Bank's market area coupled with the implementation of new and
competitive deposit products. The ability of the Bank to attract and retain
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for loans from commercial banks and
mortgage banking companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition is increasing as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
SUPERVISION AND REGULATION
Bank holding companies and commercial banks are extensively regulated under
both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company, the
Bank and any subsidiaries. This summary is qualified in its entirety by
reference to the particular statute and regulatory provisions referred to below
and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of the Company and the Bank.
Supervision, regulation and examination of the Company and the Bank by the
regulatory agencies are intended primarily for the protection of depositors
rather than shareholders of the Company. Statutes and regulations which contain
wide-ranging proposals for altering the structures, regulations and competitive
relationship of financial institutions are introduced regularly. The Company
cannot predict whether or in what form any proposed statute or regulation will
be adopted or the extent to which the business of the Company and the Bank may
be affected by such statute or regulation.
GENERAL. There are a number of obligations and restrictions imposed on
bank holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the bank's total assets at the time the bank became undercapitalized or (ii)
the amount which is necessary (or would have been necessary) to bring the bank
into compliance with all acceptable capital standards as of the time the bank
fails to comply with such capital restoration plan. The Company, as a
registered bank holding company, is subject to the regulation of the Federal
Reserve. Under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. The Federal Reserve under the BHCA also has the authority
to require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a
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nonbank subsidiary of a bank) upon the Federal Reserve's determination that such
activity or control constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by its deposit insurance
funds as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the deposit insurance funds. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
As a result of the Company's ownership of the Bank, the Company is also
registered under the bank holding company laws of North Carolina. Accordingly,
the Company is also subject to regulation and supervision by the Commissioner.
CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. Bank holding companies subject to the Federal Reserve's
capital adequacy guidelines are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets is 8%. At least half of the total capital
is required to be "Tier I capital," principally consisting of common
stockholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain goodwill items.
The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
CAPITAL REQUIREMENTS FOR THE BANK. The Bank, as a North Carolina
commercial bank, is required to maintain a surplus account equal to 50% or more
of its paid-in capital stock. As a North Carolina chartered, FDIC-insured
commercial bank which is not a member of the Federal Reserve System, the Bank is
also subject to capital requirements imposed by the FDIC. Under the FDIC's
regulations, state nonmember banks that (a) receive the highest rating during
the examination process and (b) are not anticipating or experiencing any
significant growth, are required to maintain a minimum leverage ratio of 3% of
total consolidated assets; all other banks are required to maintain a minimum
ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not
less than 4%. The Bank exceeded all applicable capital requirements as of
December 31, 2002.
DIVIDEND AND REPURCHASE LIMITATIONS. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain requirements and limitations of North Carolina corporate
law, except as set forth in this paragraph, neither the Commissioner nor the
FDIC have promulgated any regulations specifically limiting the right of the
Company to pay dividends and repurchase shares. However, the ability of the
Company to pay dividends or repurchase shares may be dependent upon the
Company's receipt of dividends from the Bank.
North Carolina commercial banks, such as the Bank, are subject to legal
limitations on the amounts of dividends they are permitted to pay. Dividends
may be paid by the Bank from undivided profits, which are determined by
deducting and charging certain items against actual profits, including any
contributions to surplus required by North Carolina law. Also, an insured
depository institution, such as the Bank, is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
defined in the applicable law and regulations).
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DEPOSIT INSURANCE ASSESSMENTS. The Bank is subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid by
members of the Bank Insurance Fund, such as the Bank, shall be as specified in a
schedule required to be issued by the FDIC. FDIC assessments for deposit
insurance range from 0 to 31 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 2002, the Bank was in compliance with
this requirement.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by regulations of the FDIC, an insured institution has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop, consistent with the CRA, the types of products and
services that it believes are best suited to its particular community. The CRA
requires the federal banking regulators, in connection with their examinations
of insured institutions, to assess the institutions' records of meeting the
credit needs of their communities, using the ratings of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance," and to take
that record into account in its evaluation of certain applications by those
institutions. All institutions are required to make public disclosure of their
CRA performance ratings. The Bank received a "satisfactory" rating in its last
CRA examination which was conducted during March 2001.
PROMPT CORRECTIVE ACTION. The FDIC has broad powers to take corrective
action to resolve the problems of insured depository institutions. The extent
of these powers will depend upon whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under the regulations, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I
risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or
greater (or 3% or greater in the case of an institution with the highest
examination rating). An institution is considered (A) "undercapitalized" if it
has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I
risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than
4% (or 3% in the case of an institution with the highest examination rating);
(B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
CHANGES IN CONTROL. The BHCA prohibits the Company from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve. Similarly, Federal Reserve
approval (or, in certain cases, non-disapproval) must be obtained prior to any
person acquiring control of the Company. Control is conclusively presumed to
exist if, among other things, a person acquires more than 25% of any class of
voting stock of the Company or controls in any manner the election of a majority
of the directors of the Company. Control is presumed to exist if a person
acquires more than 10% of any class of voting stock and the stock is registered
under Section 12 of the Securities Exchange Act of 1934 or the acquiror will be
the largest shareholder after the acquisition.
FEDERAL SECURITIES LAW. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934. As a
result of such registration, the proxy and tender offer rules, insider trading
reporting requirements, annual and periodic reporting and other requirements of
the Exchange Act are applicable to the Company.
TRANSACTIONS WITH AFFILIATES. Under current federal law, depository
institutions are subject to the restrictions contained in Section 22(h) of the
Federal Reserve Act with respect to loans to directors, executive officers and
principal shareholders. Under Section 22(h), loans to directors, executive
officers and shareholders who own more than 10% of a
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depository institution (18% in the case of institutions located in an area with
less than 30,000 in population), and certain affiliated entities of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the institution's loans-to-one-borrower limit
(as discussed below). Section 22(h) also prohibits loans above amounts
prescribed by the appropriate federal banking agency to directors, executive
officers and shareholders who own more than 10% of an institution, and their
respective affiliates, unless such loans are approved in advance by a majority
of the board of directors of the institution. Any "interested" director may not
participate in the voting. The FDIC has prescribed the loan amount (which
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the
Federal Reserve requires that loans to directors, executive officers, and
principal shareholders be made on terms substantially the same as offered in
comparable transactions with non-executive employees of the Bank. The FDIC has
imposed additional limits on the amount a bank can loan to an executive officer.
LOANS TO ONE BORROWER. The Bank is subject to the Commissioner's loans to
one borrower limits which are substantially the same as those applicable to
national banks. Under these limits, no loans and extensions of credit to any
borrower outstanding at one time and not fully secured by readily marketable
collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of
the bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and unimpaired
surplus.
GRAMM-LEACH-BLILEY ACT. Federal legislation adopted by Congress during
1999, the Gramm-Leach-Bliley Act (the "GLB Act"), has dramatically changed
various federal laws governing the banking, securities, and insurance
industries. The GLB Act has expanded opportunities for banks and bank holding
companies to provide services and engage in other revenue-generating activities
that previously were prohibited to them.
In general, the GLB Act (i) expands opportunities to affiliate with
securities firms and insurance companies; (ii) overrides certain state laws that
would prohibit certain banking and insurance affiliations; (iii) expands the
activities in which banks and bank holding companies may participate; (iv)
requires that banks and bank holding companies engage in some activities only
through affiliates owned or managed in accordance with certain requirements; (v)
reorganizes responsibility among various federal regulators for oversight of
certain securities activities conducted by banks and bank holding companies; and
(vi) requires banks to adopt and implement policies and procedures for the
protection of the financial privacy of their customers, including procedures
that allow customers to elect that certain financial information not to be
disclosed to certain persons.
USA PATRIOT ACT. In response to the events of September 11th, President
Bush signed into law the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through many means, including
broadened anti-money laundering requirements. For example, by way of amendments
to the Bank Secrecy Act, the USA PATRIOT Act encourages information sharing
among banks, bank regulatory agencies, and law enforcement bodies to prevent
money laundering. Additionally, the USA PATRIOT Act imposes several affirmative
obligations on a broad range of financial institutions, including banks,
thrifts, brokers, dealers, credit unions, money transfer agents, and parties
registered under the Commodity Exchange Act.
Pursuant to the USA PATRIOT Act, all financial institutions must establish
anti-money laundering programs that include, at a minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.
Also, the Act requires certain minimum standards with respect to customer
identification and verification. The Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United States persons or
their representatives (including foreign individuals visiting the United States)
to establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering. Furthermore, effective December 25, 2001, financial institutions
were prohibited from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not have a
physical presence in any country), and are subject to certain recordkeeping
obligations with respect to correspondent accounts of foreign banks.
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Bank regulators are directed to consider a company's effectiveness in
combating money laundering when ruling on Federal Reserve Act and Bank Merger
Act applications.
SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 was enacted in
July 2002, and became some of the most sweeping federal legislation addressing
accounting, corporate governance and disclosure issues. The impact of the
Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and
imposes significant new requirements for public company governance and
disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act
became effective immediately while others will be implemented over the coming
months.
In general, the Sarbanes-Oxley Act mandates important new corporate
governance and financial reporting requirements intended to enhance the accuracy
and transparency of public companies' reported financial results. It
establishes new responsibilities for corporate chief executive officers, chief
financial officers and audit committees in the financial reporting process and
creates a new regulatory body to oversee auditors of public companies. It backs
these requirements with new SEC enforcement tools, increases criminal penalties
for federal mail, wire and securities fraud, and creates new criminal penalties
for document and record destruction in connection with federal investigations.
It also increases the opportunity for more private litigation by lengthening the
statute of limitations for securities fraud claims and providing new federal
corporate whistleblower protection.
The full impact of the Sarbanes-Oxley Act cannot be fully measured until
the SEC acts to implement the numerous provisions for which Congress has
delegated implementation authority. The economic and operational effects of
this new legislation on public companies, including the Company, will be
significant in terms of the time, resources and costs associated with complying
with the new law. Because the Sarbanes-Oxley Act, for the most part, applies
equally to larger and smaller public companies, the Company and the Bank will be
presented with additional challenges as a smaller, community-oriented financial
institution seeking to compete with larger financial institutions in its market.
OTHER. Additional regulations require annual examinations of all insured
depository institutions by the appropriate federal banking agency, with some
exceptions for small, well-capitalized institutions and state chartered
institutions examined by state regulators. Additional regulations also
establish operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions, as well as compensation
standards.
The Bank is subject to examination by the FDIC and the Commissioner. In
addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking. The Bank, as an insured North Carolina commercial bank, is prohibited
from engaging as a principal in activities that are not permitted for national
banks, unless (i) the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and (ii) the Bank is,
and continues to be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital
stock of a North Carolina commercial bank is impaired by losses or otherwise,
the Commissioner is authorized to require payment of the deficiency by
assessment upon the bank's shareholders, pro rata, and to the extent necessary,
if any such assessment is not paid by any shareholder, upon 30 days notice, to
sell as much as is necessary of the stock of such shareholder to make good the
deficiency.
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ITEM 2. PROPERTIES
At December 31, 2002, the Bank conducted its business from the headquarters
office in Newton, North Carolina, and its fifteen other branch offices in
Lincolnton, Hickory, Newton, Catawba, Conover, Claremont, Maiden, Denver,
Triangle and Hiddenite, North Carolina. The following table sets forth certain
information regarding the Bank's properties at December 31, 2002. Unless
indicated otherwise, all properties are owned by the Bank.
Corporate Office 102 Leonard Avenue
518 West C Street Newton, NC 28658
Newton, North Carolina 28658
420 West A Street 2050 Catawba Valley Boulevard
Newton, North Carolina 28658 Hickory, North Carolina 28601
2619 North Main Avenue 760 Highway 27 West
Newton, North Carolina 28658 Lincolnton, NC 28092
213 1st Street, West
Conover, North Carolina 28613 LEASED
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3261 East Main Street 1333 2nd Street NE
Claremont, North Carolina 28610 Hickory, North Carolina 28601
6125 Highway 16 South 114 West C Street
Denver, North Carolina 28037 Newton, North Carolina 28658
(off-site storage only)
5153 N.C. Highway 90E
Hiddenite, North Carolina 28636 1910 East Main Street
Lincolnton, North Carolina 28092
200 Island Ford Road
Maiden, North Carolina 28650
3310 Springs Road NE
Hickory, North Carolina 28601
142 South Highway 16
Denver, North Carolina 28037
106 North Main Street
Catawba, North Carolina 28609
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the management, the Bank is not involved in any pending
legal proceedings other than routine, non-material proceedings occurring in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Bank's shareholders during the
quarter ended December 31, 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this Item is set forth under the section
captioned "Market for the Company's Common Equity and Related Shareholder
Matters" on page A-18 of the Annual Report, which section is incorporated herein
by reference. See "Item 1. BUSINESS--Supervision and Regulation" above for
regulatory restrictions which limit the ability of the Company to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page A-2 of the Annual Report, which table is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages A-3 through A-16 of the Annual Report, which section is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section captioned
"Quantitative and Qualitative Disclosures About Market Risk" on page A-17 of the
Annual Report, which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages A-21 through A-44 of the Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on pages 5 and 6 of the Proxy Statement and
"Proposal 1 - Election of Directors - Executive Officers" on page 9 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 5 of the Proxy Statement, which section is incorporated herein by
reference.
10
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Director Compensation" on page 8
and "- Management Compensation," " - Stock Benefits Plan," "- Employment
Agreements," "- Incentive Compensation Plans," "- Profit Sharing and 401(k)
Plans," "- Deferred Compensation Plan," "- Supplemental Retirement Plan," and "-
Discretionary Bonuses and Service Awards," on pages 9 through 19 of the Proxy
Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 4 of the Proxy Statement and the section captioned "Equity Compensation
Plan Information" on page 13 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors -
Indebtedness of and Transactions with Management" on page 19 through 20 of the
Proxy Statement, which section is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains systems of disclosure controls and procedures and
internal controls and procedures for financial reporting designed to provide
reasonable assurance as to the reliability of its published financial statements
and other disclosures included in this Annual Report on Form 10-K. The Board of
Directors, operating through its Audit and Review Committee, which is composed
entirely of independent outside directors, provides oversight to the financial
reporting process.
The Chief Executive Officer and the Chief Financial Officer of the Company
(its principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to
the date of the filing of this Report, that the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting are
effective to ensure that information required to be disclosed by the Company in
the reports filed or submitted by it under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer of the Company, as appropriate to allow timely decisions regarding
required disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
15(a)1. Consolidated Financial Statements (contained in the Annual Report
attached hereto as Exhibit (13) and incorporated herein by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of December 31,
2002 and 2001
(c) Consolidated Statements of Earnings for the Years Ended December
31, 2002, 2001 and 2000
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000
11
(e) Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2002, 2001 and 2000
(f) Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
(g) Notes to Consolidated Financial Statements
15(a)2. Financial Consolidated Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
15(a)3. Exhibits
Exhibit (3)(i) Articles of Incorporation of Peoples Bancorp of
North Carolina, Inc., incorporated by reference to
Exhibit (3)(i) to the Form 8-A filed with the
Securities and Exchange Commission on September 2,
1999
Exhibit (3)(ii) Amended and Restated Bylaws of Peoples Bancorp of
North Carolina, Inc., incorporated by reference to
Exhibit (3)(ii) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002.
Exhibit (4) Specimen Stock Certificate, incorporated by
reference to Exhibit (4) to the Form 8-A filed
with the Securities and Exchange Commission on
September 2, 1999
Exhibit (10)(a) Employment Agreement between Peoples Bank and Tony
W. Wolfe incorporated by reference to Exhibit
(10)(a) to the Form 10-K filed with the Securities
and Exchange Commission on March 30, 2000
Exhibit (10)(b) Employment Agreement between Peoples Bank and
Joseph F. Beaman, Jr. incorporated by reference to
Exhibit (10)(b) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(c) Employment Agreement between Peoples Bank and
William D. Cable incorporated by reference to
Exhibit (10)(d) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(d) Employment Agreement between Peoples Bank and
Lance A. Sellers incorporated by reference to
Exhibit (10)(e) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(e) Peoples Bancorp of North Carolina, Inc. Omnibus
Stock Ownership and Long Term Incentive Plan
incorporated by reference to Exhibit (10)(f) to
the Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(f) Employment Agreement between Peoples Bank and A.
Joseph Lampron, incorporated by reference to
Exhibit 10(g) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
12
Exhibit (10)(g) Peoples Bank Directors' and Officers' Deferral
Plan, incorporated by reference to Exhibit 10(h)
to the Form 10-K filed with the Securities and
Exchange Commission on March 28, 2002
Exhibit (10)(h) Rabbi Trust for the Peoples Bank Directors' and
Officers' Deferral Plan, incorporated by reference
to Exhibit 10(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
Exhibit (10)(i) Description of Service Recognition Program
maintained by Peoples Bank
Exhibit (11) Statement regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 2002 Annual Report of Peoples Bancorp of North
Carolina, Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North Carolina,
Inc.
Exhibit (23)(a) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on August 10,
2000
Exhibit (23)(b) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on September
28, 2000
Exhibit (99) Certification Pursuant to 18 U.S.C. Section 1350
15(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 2002.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Peoples Bancorp of North Carolina, Inc.
(Registrant)
By: /s/ Tony W. Wolfe
---------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
Date: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Tony W. Wolfe President and Chief Executive Officer March 27, 2003
- --------------------------- (Principal Executive Officer) --------------
Tony W. Wolfe
/s/ Robert C. Abernethy Chairman of the Board and Director March 27, 2003
- --------------------------- --------------
Robert C. Abernethy
/s/ A. Joseph Lampron Executive Vice President and Chief Financial March 27, 2003
- --------------------------- Officer (Principal Financial and --------------
A. Joseph Lampron Principal Accounting Officer)
/s/ James S. Abernethy Director March 27, 2003
- --------------------------- --------------
James S. Abernethy
/s/ Bruce R. Eckard Director March 27, 2003
- --------------------------- --------------
Bruce R. Eckard
/s/ John H. Elmore, Jr. Director March 27, 2003
- --------------------------- --------------
John H. Elmore, Jr.
/s/ Charles F. Murray Director March 27, 2003
- --------------------------- --------------
Charles F. Murray
/s/ Gary E. Matthews Director March 27, 2003
- --------------------------- --------------
Gary E. Matthews
/s/ Larry E. Robinson Director March 27, 2003
- --------------------------- --------------
Larry E. Robinson
/s/ Fred L. Sherrill, Jr. Director March 27, 2003
- --------------------------- --------------
Fred L. Sherrill, Jr.
/s/ Dan Ray Timmerman, Sr. Director March 27, 2003
- --------------------------- --------------
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary Director March 27, 2003
- --------------------------- --------------
Benjamin I. Zachary
14
CERTIFICATIONS
--------------
I, Tony W. Wolfe, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp
of North Carolina, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Tony W. Wolfe
-------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
15
CERTIFICATIONS
--------------
I, A. Joseph Lampron, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp
of North Carolina, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ A. Joseph Lampron
-------------------------------------
A. Joseph Lampron
Executive Vice President and Chief Financial Officer
16